Reality check: George Osborne's speech

The chancellor announces a council tax freeze and broadband funding in his speech to the Conservative party conference. Polly Curtis, with your help, stress-tests his announcements. Email your views to polly.curtis@guardian.co.uk, contact her on Twitter @pollycurtis or join the debate below the line.

Chancellor George Osborne before a television interview outside Manchester Central on day two of the Conservative Party Conference in Manchester. PRESS ASSOCIATION Photo. Picture date: Monday October 3, 2011. Photo credit should read: Dave Thompson/PA Wire Photograph: Dave Thompson/PA

George Osborne is under pressure to come up with new policies to help working families and stimulate economic growth in his speech to Conservative party conference today. We will be fact-checking his announcements as he makes them. Can you help? Email your views to polly.curtis@guardian.co.uk, contact me on Twitter @pollycurtis or join the debate below the line.

Pre-briefing of the chancellor's speech revealed he will announce the second year of a council tax freeze costing the treasury £800m and saving the average family £72 a year on top of the £72 of the first freeze in 2011-12. George Osborne said today that it was an example of the government helping people where they could, even in difficult economic circumstances.

Labour are saying it's a recycled announcement because the Tories promised a two-year freeze in council tax at their conference in 2008 and the coalition agreement indicates that they want to do it. The document says:

We will freeze Council Tax in England for at least one year, and seek to freeze it for a further year, in partnership with local authorities.

Councils have been so sure that the freeze would happen again that many have already factored it into their budget for next year. However, today's announcement is a first confirmation that Osborne has found the money to do this in 2012-13.

Who will benefit?

The independent Institute for Fiscal Studies did this analysis of the potential impact of a two year freeze. The graph below shows that the very poorest people stand to gain the most in terms of the net change to their income and the very richest, for whom council tax is a tiny proportion of their income, stand to gain the least.

But the people in the second and third income decile groups will benefit least and those at the top end, in the 5th-9th groups, benefit the most.

Graph showing the distributional impact of the two-year council tax freeze. Photograph: Insitute for Fiscal Studies

Carl Emmerson, deputy director of the IFS, says:

Who benefits the most? The very poorest and those in the middle. Those who are poor but not the poorest and the very richest will gain the least. The people who gain the least are the ones on council tax benefit.

It puts some money in people's pockets but it's not doing anything to make the council funding system better. Presumably the grant needs to be permanently higher otherwise you'll see council tax bounce back. It goes against the grain of localism – there are more string attached. It's very different to what government had previously done – got rid of the strings attached.

Though the very poorest benefit the most from the council tax freeze a large proportion of working poor households benefit less than the very richest.

How does it work for councils?

In the first year of the freeze councils only qualified for the subsidy if they completely froze council taxes for residents. Every council in the country did this. But the subsidy from the government was 2.5% of their council tax bill, and with inflation running higher than that, it amounts to a de facto cut on top of their other reducing central government budgets. The rate of Consumer Prices Index (CPI) inflation is currently 4.5%, and the Retail Prices Index measure (which includes housing costs including mortgage payments) is 5.2%.

Simon Parker, director of the New Local Government Network says:

At the moment it is never going to be enough because councils are facing huge cost pressures. It will result in councils making a real terms loss on their income but given the huge pressures that households are under at the moment I suspect they will all sign up to it again. This speaks to the fundamental silliness of the local government funding system that to achieve a steady state you have to increase council tax.

The council funding system is bust and this is a sticking plaster. You need to find a more sustainable way for funding the system. It's interesting that government that keeps telling us there's no money had magicked up a billion pounds for this. The big thing that councils are struggling with are elderly care, children's care, there is a legitimate question to be asked about where this money is coming from and is it directed to the right things?

He adds that there are some suggestions amongst Labour councils that because Tory councils are more likely to be the leafy shires with wealthier households. "That sounds roughly plausible. More rural areas raise more from council tax," he says.

The Conservatives are taking credit for the £800m to implement a second year of council tax cuts but councils themselves will have to find more savings to make it work.

This graph, sent over by my colleagues on the Guardian's datablog, reveals how council tax rises for many years outstripped inflation but that trend has now been reversed since 2007.

Will the freeze remain in place?

The next council tax rise could start from April 2014, unless the government extends the freeze further. The money to pay for the two years of freezes is in place until the end of the spending review, but if the government chose to withdraw it after that councils would face another substantial cut meaning there is some instability in the system and households could face higher "catch-up" rises from 2016.

There are also questions about the future of council tax benefit funding. The government is proposing to localise council tax benefits, which are paid to reduce bills to the unemployed, low earners and pensioners, while also cutting the funding by 10%. It means councils are taking responsibility for a system that will almost inevitably increase bills for some from 2013-14. The government has also said that pensioners should be protected from these cuts so other low-income households could face rises in excess of 10% from next year. It will save £500m a year – less than the £800m announced today. A document produced by Camden Council (pdf) about the implications of this says:

The London Borough of Camden does not support the proposals for localisation of council tax support as we believe that they present an unacceptable financial risk to local authorities at a time when councils are already facing significant funding cuts. The proposals undermine the stability and excellent collection rates of council tax and will lead to public discontent and non payment that became the hallmark of the Community Charge. We believe that the costs of setting up and administering the scheme, taken with an inevitable increase in the cost of collecting council tax and reduced collection rates, will cost the public purse far more than the 10% reduction in expenditure.

So far at this Conservative party conference, the government has announced £250m for weekly bin collections, £800m for a council tax freeze, £150m to improve broadband networks and £50m for a technology hub in Manchester. The treasury says that the money for each is coming from department "underspends", which occur every year and are inevitable when a government is dealing with a £350bn budget.

I've just been speaking with a source in the treasury about how these underspends work. The source tells me that six months into the financial year the treasury usually has a pretty good idea of where the underspends are occurring. But this year something else has happened. Last year the government abolished "end year flexibility" which allowed Whitehall departments to roll over unspent money year to year, in a bid to claw the money back for the treasury and incentivise departments to use their budgets properly.

The new system, Budget Exchange, allows departments to voluntarily surrender underspends throughout the year in return for a corresponding increase in their budget the next. This essentially still allows for rolling-over budgets, but it puts the treasury firmly in control of where they are happening and when.

My source describes this change as a "contributary factor" in Osborne's ability to make a few give-aways today, even when times are some tight. Osborne is in the position to make costly announcements because he has reformed the accounting system giving him a tighter grip on Whitehall spending.

I'm sure there's more to this - does anyone have any more information about where this funding is coming from? Email your views to polly.curtis@guardian.co.uk, contact me on Twitter @pollycurtis or join the debate below the line.

The FT Lexicon has this definition of what credit easing is. It says it is:

The practice in which central banks purchase private sector assets with a view to adding liquidity to a troubled market and so easing the flow of credit and lending in the economy.

It is closely related to quantitative easing, whereby a central bank pumps money into a flagging economy and was first adopted by the US federal research in 20080-9 by Ben Bernanke. This Wall Street Journal blog describes the difference between quantitative and credit easing.

Osborne's speech makes clear that the treasury is only investigating this option as an idea, so there are no firm details about how it might work expected today. The BBC's Robert Peston has been briefed by the treasury and has blogged some more detail of their current thinking about how it might work. He says that the government will purchase company bonds in order to free up money for investment, starting with bigger companies that already issue bonds and moving on to smaller ones that will be packaged together to create bonds for them for the first time.

I've just been speaking with Jonathan Portes, director of the National Institute of Economic and Social Research, formerly chief economist to the cabinet office, who says that credit easing could allow Osborne to circumvent his own rule - reiterated today in the same speech - to stick with the current fiscal plans and at the same time pump money into the economy. He said:

It's a way of getting money out there without u-turning on fiscal policy. Once you get into the business of setting up a state bank to lend, it's not really monetary policy any more its loosening fiscal policy by the backdoor.

There are various different ways of doing this. But the point is clear. We are talking about monetary and fiscal policy acting together. It is contradictory for George Osborne to say we aren't going to loosen fiscal policy and do something like this.

He pointed me to this speech (pdf) given earlier this month by Adam Posen, an external member of the Monetary Policy Committee, in which Posen advocated a policy of credit easing. The idea has gained currency in recent weeks culminating in today's announcement. You can read more about it in this report by the Guardian's Larry Elliot.

Andrew Sparrow, who is live-blogging the Tory conference, has also been briefed by party officials and has posted a fuller explanation here. The following point he reports tallies with Portes questioning of whether this is contradictory to the treasury's own rules.

"Credit easing" will not add to the deficit because the Treasury will be buying assets (bonds). The government will have to borrow to fund the scheme. But that money will no count as borrowing because it will be secured against assets. That's why the Tories are adamant that this is "not plan B".

Osborne lays the blame for the country's economic woes on Labour's borrowing. He said:

The last government borrowed too much money. They thought you could borrow without regard to ability to pay, spend without regard for value for money, all on the premise that boom would never end in bust.

They saddled the country with the worst debt crisis in our history. What a catastrophic mistake. Let us make sure it never happens again.

Julia Finch, the Guardian's City editor, says the chancellor's analysis does not stand up to scrutiny. She writes:

It is far too easy to just blame profligate Labour spending for the current crisis. The argument goes that if Gordon Brown and Alistair Darling had been running a whopping surplus before the credit crunch, the banking crisis and the ensuing recession, then we would not be where we are now.

That simply does not hold water. Two nations that have required an IMF bailout - Iceland and Ireland - were both in surplus in 2007, as was Spain, which could still need one. Between 2002 and 2008, according to the Treasury Red Book, government spending did increase - but no faster than its income. In those years the gap between the two - with spending highest - was equal to about 3% of GDP. Then came 2008 and the banking crisis.

Public spending soared as cash was poured into the banks, while the recession slashed tax receipts. The gap between spending and receipts widened to more than 10% of GDP. Economic growth is now required to increase receipts, while the government's Plan A austerity programme is designed to whittle down spending at the same time.

Even the independent governor of the Bank of England, Mervyn King (though some might say he leans a little towards the current coalition government) has pointed out that the current spending cuts are largely the result of the banking crisis. But Labour is not completely blameless: if it had regulated the banks better the current problems would be smaller.

Can I suggest you might contrast tax evasion element of Chancellor's speech y'day (we will find you) with Swiss topping.

I think it's a fair point. On tax evasion, the chancellor said:

I want people to be successful. To create wealth and jobs. To get the most out of society - and to put something back. But I'll tell you what this Conservative Chancellor says to rich people who evade their taxes.

We will find you. And we will find your money The days of getting away with it are over.Just as tough on tax evasion as benefit fraud.

But the biggest policy on tax evasion that the treasury has announced is a deal with Switzerland which mandates the Swiss banks to impose a "withholding" tax on British owned bank accounts. Tax rates will be set slightly lower than UK rates, maintaining the advantage for people to keep their cash off-shore, and crucially it will maintain the secrecy in the Swiss system.

The British government will never know which British citizens are holding how much money in Swiss accounts. The treasury argues it allows the government to get money it otherwise wouldn't and quicker than through the self-assessment system, the justification for setting the rates lower. But it certainly doesn't tick the "we will find you" box.

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About this article

Reality check: George Osborne's speech

This article was published on
the Guardian website
at 10.22 EDT on Monday 3 October 2011.
It was last modified at 13.40 EDT on Tuesday 20 May 2014.
It was first published at 05.42 EDT on Monday 3 October 2011.